Tax havens are an essential feature of the shadow economy. Although the nature of tax havens is complicated at one level, it is simple at another—The purpose is always to minimize, or better yet eliminate taxes. There is a race to the bottom in terms of tax competition, so advanced now that there is really no need for a corporation (or a wealthy individual who can set up as an international business) to pay tax. Those in business are oriented to saving costs, and what better way than to avoid taxes, the most evil of all costs. To place a positive spin on this behavior, a favorite rationale is that we all should have the right to financial freedom. A fatal flaw with this argument is that no one, individual or corporate, earns money in isolation. There is always a societal context to the money earned. For example, the high-level drug dealer relies on users, growers, processors, street-level sellers, and enforcers. A fraudster must have victims and typically depends on accomplices, or at least the naïve who assist in the deception. Corporations must sell their services or products to people, and usually have employees. Hence, all money is made in a societal context and never in isolation. Giving back to that society for services provided, such as roads, waste removal, water, health care, and the like is a very important aspect of a social justice.

So assuming that social justice is not a priority, or even a consideration, how can taxes be avoided or minimized? The starting point is to realize that all incorporated entities pay the taxes of the location they are registered in. Even if a corporation is registered in a first world country with higher taxes, subsidiary companies or shell companies can be set up where taxes are nil or low, reducing the overall tax burden. Another key issue is double taxation treaties, or more appropriately, “double non-taxation” treaties. These widespread treaties ensure that an incorporated entity cannot be taxed twice, so if the taxation (or lack thereof) occurs in a tax haven, it cannot take place elsewhere. If you are a wealthy individual who does international consulting work and set up your corporation in a tax haven, then you will be taxed at that rate, typically zero, and cannot be taxed anywhere else. Income earned by you that is drawn from your corporation might or might not be taxed, based on the country you reside in. The US ensures that any money made by individuals anywhere in the world is taxed, but other countries do not have this requirement. Taxation is of course only on money that you draw from your corporation as an employee. A holding company or asset protection trust might be set up where assets can be held with no or little tax, and no one will learn the identity of who owns the assets. These assets can be repatriated to your country without incurring tax. Luxembourg has 15,000 holding companies. Another way might be to purchase a plane, boat, or property, and make it a corporate expenditure such as a rental unit. You hopefully get the idea that incorporated entities can avoid or minimize taxes. The cost of incorporating in most tax havens is about $2,000-$3,000 US, with a maintenance cost of $1,000 per year. A favorite form of incorporation is the International Business Corporation (IBC).

A common procedure is to register a company in a tax haven with no taxes, and preferably one with limited or no treaties regarding legal infringement. Two such treaties consist of: Tax Information Exchange Agreement (TIEA) with the US to of course exchange tax information, and the Mutual Legal Assistance Treaty (MLAT) to help law enforcement in criminal matters, but not tax evasion. If you are a US citizen and wish to evade taxes, tax havens who have signed a TIEA with your government are to be avoided, and if you are a criminal laundering money the MLAT ones are best to avoid. Tax Havens Today lists the countries that have signed these treaties. Banking services are available in these tax havens, and an interesting arrangement that is often utilized is the back-to-back loan. Basically it consists of the money in your offshore account being used as collateral for a loan. This makes a profit appear as a loan, and hence a debt. It is magic how such transformations occur in the shadow economy, but we are learning some of the magic tricks. If a person or corporation is not comfortable with the banks in the given offshore no or low tax haven, money can be shifted to a bank in say Switzerland. Swiss banking is top notch and there is great liquidity, meaning that cash assets cover all potential withdrawals. US banks are often not highly liquid. Half of all financial transactions in Switzerland involve another offshore jurisdiction.

So far then taxes have been avoided, secure banking arranged that can amongst other things make a profit look like a debt, and assets protected in a holding company or asset protection trust. Is that all that tax havens and the shadow economy can provide? Actually, there is a lot more. Offshore insurance companies can insure your business for a very attractive rate. What happens if you need to manufacture or warehouse something? Special economic zones exist where there are no labor standards, minimal pay for long hours of work, no environmental regulations, and no taxes. In 1975 there were only 79 of these special economic zones, but the number increased to 2,600 by 2006. Products likely have to be shipped if manufactured or warehoused in special economic zones. Flags of convenience for shipping vessels become very important. Nations such as Panama and Malta are ideal to register ships in, because there are no or minimal taxes, and no standards worth mentioning for the boat or crew. It would seem that pretty much everything has been covered so far, but could still there be more?